Liability of Third Parties to Account - KR and DA Flashcards
(22 cards)
What is the liability of third parties to account in equity?
Liability to account in equity arises when a third party, who is not a trustee or fiduciary, is held personally liable because they have either:
Dishonestly assisted in a breach of trust (→ dishonest assistance), or
Knowingly received trust property in breach of trust (→ knowing/unconscionable receipt).
In these cases, equity imposes personal liability due to the third party’s knowledge, dishonesty, or unconscionable conduct
What circumstances does LTA apply in?
Where a trust is breached, the normal target for litigation is the trustee.
The trustee might face:
i) Proprietary liability (constructive trust).
ii) Personal liability to the beneficiaries.
iii) The tracing of trust property (and the return of trust property).
But Third-party liability may be pursued when:
The trustee is insolvent - trustee cannot compensate for the breach of trust, beneficiaries may look to third parties who were involved.
It is no longer possible to trace trust property - If the trust property cannot be located or has been dissipated, a proprietary remedy (like a constructive trust) is unavailable — so personal liability (like dishonest assistance or knowing receipt) is the only route.
The third party has benefited from the breach - If a third party received trust property or profited from assisting a breach, equity may impose liability even if they weren’t formally a trustee.
What are the two primary heads of liability for third parties to account?
Dishonest Assistance: Assisting in a breach of trust or fiduciary duty with dishonesty.
Knowing/Unconscionable Receipt: Receiving or dealing with trust property while possessing sufficient knowledge of the breach.
What is required for liability under dishonest assistance?
It is not enough to assist in a breach of trust; the assistance must be dishonest. Dishonesty is judged by an objective standard—whether an honest person in the same circumstances would act similarly. Royal Brunei Airlines v Tan [1995]
What is required for liability under knowing receipt?
The recipient must have knowledge (actual or constructive) of the breach of trust or fiduciary duty.
In Ireland, constructive knowledge is sufficient Re: Frederick Inns [1994],
while in England, the test focuses on “unconscionability” Bank of Credit and Commerce International (BCCI) v Akindele [2001]
How Does the Limitation Act 1980 Apply to Trust Claims? (Dishonest Assistance:UK)
The Limitation Act 1980, s 21 states that no time limit applies to claims by beneficiaries in cases of:
Fraudulent breach of trust by the trustee.
Recovery of trust property still held by the trustee.
However, this protection only applies to trustees—it does not extend to third parties like dishonest assisters or knowing recipients.
What was the significance of Williams v Central Bank of Nigeria [2014]? (UK)
Ruled that: Third parties (e.g., dishonest assisters or knowing recipients) may be liable to account, but they are not trustees.
Because they are outsiders to the trust, claims against them are subject to standard time limits.
This means beneficiaries cannot sue third parties indefinitely, unlike trustees who remain liable beyond limitation periods.
Uk test for dishonest assistance? (UK)
(1995)
The case established that liability for dishonest assistance focuses on the dishonesty of the assistant, not the trustee. Dishonesty is judged objectively, based on what an honest person would do in the circumstances. unusual in the law – dishonesty is often subjective
Identifying Dishonesty?
Dishonesty is decided objectively – would an honest person in the assistant’s shoes behave similarly?
How else can we tease out the idea of dishonesty? – Knowledge.
If the assistance knew nothing of the trustee’s misconduct then they are likely honest.
If they were firmly aware of the trustee’s misconduct then are likely dishonest
How does the Baden scale classify knowledge? (Baden v Société Générale)
The Baden scale identifies five levels of knowledge:
Suggest Dishonesty:
i) actual knowledge - person genuinely knows the relevant facts.
(ii) wilfully shutting one’s eyes to the obvious - deliberately avoids confirming something they suspect is wrong
(iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make - should strongly suspect something is wrong and fails to investigate, even though a reasonable and honest person would.
Suggest Honesty:
knowledge of circumstances which would indicate the facts to an honest and reasonable man - aware of facts or circumstances that would clearly suggest the truth to an honest and reasonable person
knowledge of circumstances which would put an honest and reasonable man on inquiry - person knows something is suspicious, but not necessarily what. An honest and reasonable person would be prompted to investigate further.
Was the Baden test always followed?
NO
AGIP (Africa) v Jackson (1990)
The court moved away from relying solely on the Baden scale. Instead, the primary question is whether the defendant’s conduct was honest or dishonest, judged by an objective standard.
Which case introduced a hybrid test?
Twinsectra v Yardley (2002)
The case introduced a hybrid test, suggesting that dishonesty requires the defendant to realize that their conduct would be regarded as dishonest by honest people. This added subjectivity to the test, trying to mitigate some of the harshness of the purely objective approach.
But there was disagreement in House of Lords over this arguing it unecessarily complicated matters.
Did the hybrid test stick around?
NO
Barlow Clowes v Eurotrust (2006) reaffirmed that dishonesty is judged objectively, but the defendant’s knowledge and awareness are considered.
aligning with Royal Brunei more than Twinsectra.
Irish Approach to Dishonest Assistance?
does not have the same fully developed doctrine of dishonest assistance as England, Irish courts generally follow English equity with some nuances:
Irish courts have been more cautious in extending the doctrine of dishonest assistance.
Irish courts appear to lean towards a more stringent standard of dishonesty, closer to actual knowledge or recklessness, rather than the hybrid test in Tan.
There is no definitive Irish Supreme Court decision embracing the full Tan approach, and the courts may require clear knowledge of the breach or active involvement.
Remedies for Dishonest Assistance - Account of Profits?
Hotel Portfolio II UK Limited v Ruhan(2023) Account of profits: requires the wrongdoer to surrender any profits made from their dishonest assistance, even if the beneficiary suffered no financial loss.
The fiduciary (Director) was liable to account for profits obtained from breaching fiduciary duty.
The dishonest assistant was liable to account only for the profits he personally made from assisting in the breach. ensures that wrongdoers cannot benefit from dishonest assistance
Subjective v Objective: Academic Views
Ryan [2007] Conv 188, 196 -
“irrelevant that the defendant adhered to different standards or that he was unaware that his conduct would be objectively regarded as dishonest” if it would ordinarily be considered to be dishonest
What is the Irish approach to knowing receipt?
In Ireland, actual or constructive knowledge of the breach is sufficient for liability. This is a stricter standard than the unconscionability test used in England.
Unconscionability; UK
Agip Africa (Ltd) v Jackson – Some doubts about whether constructive knowledge alone is sufficient.
Bank of Credit and Commerce International (Overseas) Ltd v Akindele - ‘recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt
firmly established in England.
Actual vs Constructive Knowledge
Actual: refers to what the person actually knew—facts or circumstances they were consciously aware of.
Constructive: what a person ought to have known, even if they did not actually know it
Is constructive knowledge sufficient for Irish law?
Re Frederick Inns Ltd (1994)The court held that constructive knowledge was sufficient for liability. Payments made in breach of the company’s constitution were recoverable because the recipient (Revenue) was on constructive notice.
What is the most recent Irish knowing receipt case?
O’Donnell v Bank of Ireland (2014) ‘knowledge, actual or constructive’ of the breach of trust is necessary
The Irish Supreme Court acknowledged the divergence between Irish and English law but upheld the constructive knowledge test. The court left open the possibility of adopting the unconscionability test in the future.
Most recent English case for knowing receipt and what it ruled??
Byers v National Saudi Bank(2023) confirmed that for knowing receipt to be actionable:
“There must be a continuing equitable proprietary interest in the property at the time of receipt.”
Is personal liability for knowing receipt based on receiving property subject to a beneficial interest? What if the property is received free of such an interest (e.g., under foreign law)?
A: ✅ Yes — liability requires receipt of property with a continuing equitable (beneficial) interest. If the property is received free of that interest (e.g., under Saudi law), the personal claim fails
